The Boston Globe has an interesting piece on the perils of default selection criteria for the 2015 Exchange open enrollment period.I think the piece has a good amount of information in it, but I don’t think it is as clear as it could be.
Here’s the issue, in a nutshell:
To streamline next year’s open enrollment season, the Health and Human Services Department recently proposed offering automatic renewal to 8 million consumers who are already signed up.
But the fine print of the HHS announcement said consumers who auto-enroll will get ‘‘the exact dollar amount’’ of financial aid they are receiving this year.
From my understanding, HHS has a nasty problem. All sorts of behavioral economics research indicate that forcing people to make new choices where the default is to choose nothing leads to no coverage, will lead to quite a few people to drop out of the market even though they would usually want to get back in. Opt-ins are poor choice structures. So HHS has to find an opt-out method. Due to data limitations, they are creating a default that assumes 2015 choices and financial situation will be exactly the same as 2014 family, finances and choices. Is this a good method? Not really. Is it a defensible method to make sure people don’t fall through the cracks? Yes.
What are the weaknesses?
We have to remember that subsidies are calculated with two independent functions. Total subsidy is the difference between the market price of the chosen plan minus the combined function of a given percentage of family income for a given FPL level and the market price of the second cheapest silver
The first function is the family’s income situation. Basically this is a combination of how much income does the family pull in, and how large is the relevant portion of thefamily. There are a couple of failure points in the default assumptions being made by HHS. It does not take into account changes in income from either new jobs, fewer hours, pay rate changes. For instance, if my family was on the Exchange this year, HHS’s default assumptions would not recognize my recent pay raise unless I enter that data into Healthcare.gov. The other significant failure point is family size. If my brother was on the Exchange as a single male, and he got married in December instead of July, his subsidy, as well as the subsidy for my new sister in law would be calculated on their independent single person’s incomes. They would most likely be defaulted into too rich of a subsidy. My senior year roommate is due to give birth to her second son in December, so their subsidy would be too low as the family size would be four for the 2015insurance year instead of the assumed three. Finally, we can assume that the Consumer Price Index which drives the changes in the Federal Poverty Levels is positive. 150% Federal Poverty line in 2014 will be several hundred dollars less than 150% FPL for 2015 calculation purposes. So even the people who have had no changes in family size, and made exactly the same in 2014 as they did in 2013, will see a default subsidy that is less than they are entitled for. I am not too worried about that scenario as I know HHS and the IRS will engage in a massive reconcilation effort to make people whole at some point in 2015/2016.
The other major function of subsidy is calculating what the subsidy should be based on. Subsidies are based on the second least expensive Silver plan in the Exchange for the location where an Exchange buyer lives. HHS is assuming two things. First, the second least expensive Silver is the same plan. And secondly, it is the same price. Both assumptions are highly problematic.
In 2014, we hvae seen that the two cheapest silver plans in a region tend to be among the best selling plans. We have also seen the lowest cost policies be much more likelyto see significant price increases than higher cost plans. When I have not had my first cup of coffee in the morning, so I am feeling charitable, I’ll attribute this to primarily a “winner’s curse” scenario where the cheapest Silvers were using the most optimistic defensible assumptions on their pricing models. After my first cup of coffee, and when I am cynical, I’m betting that at least a good chunk of the two cheapest Silvers are loss leaders being used to build out membership as membership tends to be fairly sticky in the insurance industry. In either case, there is a strong motivation for the cheaest plans to increase and the most expensive plans to either increase at a much slower rate or actually decrease premiums. Additionally, there are new plan designs and new competitors entering more markets this year. There is a very good chance that the second lowest price Silver plan changes due to either a new low cost entry, or a plan that was #3/4/5 in the region being priced more aggressively to set the local subsidy line. An individual who was on the second cheapest Silver in 2014 but now is on the 5th cheapest Silver in 2015 will see a significant rise in out of pocket premium costs. Conversely, an individual who had the #4 Silver in 2014 but is defaulted to the #2 Silver in 2015 will see a premium drop.
Furthermore, premiums are projected to increase by 8% or so. Assuming a static market that is doing nothing but reflect national trends, the baseline second Silver premium support subsidy would be significantly richer. Finally, the premiums for someone age 38 are, all else being equal, a bit cheaper than the premium for someone who is now age 39 in 2015. The default assumptions on the plan side of the equation seem to be weighed towards giving people too little premium support subsidies than too much in most scenarios.
So how could this be improved in 2016?
The short answer is to improve the back-end functionality of Healthcare.gov to allow real time subsidy calculations and a decision support tool that would pick, as the default, the optimal plan based on past family choices. A second best choice would be to integrate IRS and Exchange data for better income calculations, as well as new CMS FQHP data to determine 2nd best Silver to get real time subsidy values and then default people who are in 2nd best Silvers or better to those same plans, while creating a reach out list of people who would see premium/subsidy shock with a fall back option of defaulting them into a random choice of nearly comparable plans at relatively close price points. There is no optimal choice, as different weights attached to different outcomes and hassle factors will lead to different choices. I think that there are significant improvements to more satisfactory choices than the current default system.